Ahh Christmas Vacation. The two weeks off from school was always greatly anticipated and sadly passed too quickly. The early part of the time off was spent contemplating all the toys that would be received at Christmas. The Following week was spent playing with, breaking and losing the gifts that had been received. New Years Day was typically spent in a frump knowing that January and school was upon us. If you have not yet watched Spirited, it is a great Christmas movie. I highly recommend it. In the movie is a great line. Paraphrased it is, the leading cause of death in 1843 was……January. As a kid I could relate to that.
There is some good news on the inflation rate. It appears that the supply chain issues are close to being resolved in most cases. While the hang over related to the rapid rise in the money supply will be with us for a while, there has at least been a lull in price increases recently. Since July the monthly inflation numbers equate to an annualized inflation rate of just 2.4%. This is slightly higher than the Fed’s target and about 1% over the pre pandemic rate. While the average number has abated, digging into the report shows that we are still being plagued by specific segments of inflation that will continue to be painful.
The softening of inflation on a month-to-month basis is primarily the result of deflation in the energy sector. The drop of 1.6% in energy prices in November hides areas where our budgets are still under attack. Food prices rose .5%. Shelter costs related to housing, either house prices or rents continue to climb, but at a slower rate than prior months. The increase in shelter inflation was .6%, down from .8% in prior months.
The Fed’s rate increases are targeted at demand destruction. If you curtail demand, prices will fall. However, the purchasing drop is not going to be evenly spread out. Consumer spending on retail items is showing a significant slowdown during the Christmas holiday season. Consumers are clearly cutting back on Christmas purchases, as reflected in the US Retail Sales number released last week, and shifting the funds to grocery purchases. Again, this is not uniform over all income segments. Travel and other discretionary spending in the higher income levels continue at impressive rates. The airlines are reporting record number of sales for December. Many travel destinations are also sharing that room bookings and event tickets are higher than expectations.
The first quarter of every year is typically a down time for consumer spending. Most are paying off Christmas bills as well as attempting to rebuild their savings. If the past trends continue, retailers are going to be in increasingly tough positions. In surveying the inventory remaining in the stores, just a week ahead of Christmas, we are finding a massive amount of inventory remaining. For the consumer, we could see some massive discounts from the stores to blow out merchandise that is left over. This will be devastating to the bottom line of the stores. Many who are struggling may fail by the end of the first quarter in 2023.
The December Manufacturing Indexes from the Federal Reserve Banks are plummeting. The Empire State index fell to -11.2. The Philly Fed registered a drop of 13.8 after a November number of -19.4. Both indexes reported negative numbers related to new orders, a clear sign that inventories appear to be sufficient in light of the consumer spending levels. On Thursday the November US Manufacturing Production report was released. The report showed a decline of .6% in November.
Remember, manufacturing accounts for about 12% of our total economy. It is the service sector that is the primary driver in economic activity. At this time the service sector is not seeing the drop that manufacturing and retail are. The service sector is also seeing elevated levels of price increases. Watching the January and February 2023 numbers in the service area of the economy will tell us whether and how deep a recession might be.
I will be taking a two-week hiatus to enjoy both Christmas and New Year’s. Thank you for reading the Economic Updates. I hope they are helpful in your decision making. Have a Merry Christmas and may the New Year be one filled with blessings for you and your family.
